A microphysical model for Mars dust and ice clouds has been applied in combination with a model of the planetary boundary layer (PBL) for the interpretation of measurements by the LIDAR instrument on the Phoenix Mars mission. The model simulates nighttime clouds and fall streaks within the PBL that are similar in structure to the LIDAR observations. The observed regular daily pattern of water ice cloud formation and precipitation at the top of the PBL is interpreted as a diurnal process in the local water cycle in which precipitation of large ice crystals (30–50 μm effective radius) results in downward transport of water vapor within the PBL. This is followed by strong vertical mixing during daytime, and this cycle is repeated every sol to confine water vapor within the PBL.